Nepal must relearn the lesson small states often forget, that passivity is not neutrality
In a world where geopolitics increasingly shapes economics, the new trade agreement between India and the European Union is more than a routine free-trade deal, it is a strategic signal. Europe is searching for alternatives to China's manufacturing dominance. For its part, India is seeking recognition as the democratic industrial hub of the Indo-Pacific. What emerges is a partnership driven as much by principles as by necessities. Yet the ripples of this partnership will extend beyond the halls of New Delhi and Brussels, with significant consequences to emerge in Kathmandu.
On paper, the deal is impressive. Termed the "mother of all deals" by the World Economic Forum, it creates the world's largest free trade zone, encompassing two billion people and nearly 25% of global GDP. A deal 20 years in the making, it promises tariff reductions on manufactured goods, deeper access for services, expanded cooperation on data governance, sustainability, and investment. Strategically, it binds India closer to Europe and marks a subtle but clear shift in the EU's Asia strategy. The subtext is hard to miss, as global rivalries harden, Europe is placing a long-term bet on India.
But strategic realignment rarely ends at national borders. As India ramps up manufacturing to optimise European market access, the deal's impacts on neighbouring economies will grow stronger. Nepal, deeply reliant on Indian transit routes and supply chains, will feel this shift acutely and almost immediately.
For Nepal, timing is particularly sensitive. China's footprint across the Himalayas has expanded steadily through roads, airports, and political outreach. The EU-India agreement reinforces India's regional standing in ways Beijing will not ignore. For Nepal, it will add new layers to the externalities of being caught in the middle of great power dynamics.
Nepal's export profile to Europe (primarily garments, carpets, pashmina, tea, essential oils, leather-goods) remains narrow and fragile. These sectors already operate on thin margins and limited scale. As Indian producers gain tariff-free (zero-duty) access to Europe and benefit from larger investments and regulatory clarity, Nepali exporters risk being priced out of their few viable markets.
Transit pressure may also intensify. As India's Europe-bound trade grows, Nepal's goods could find themselves pushed further down the priority list at congested ports. Delays that Nepali traders already endure may become longer and costlier. For a landlocked economy, time is money in the most literal sense. Rising costs could push some traders to look north, towards Chinese overland routes that are still incomplete, but will become increasingly tempting. These choices matter in South Asia where the lines between infrastructure choices and political alignments are blurred.
The risks extend beyond commerce. India's elevation as Europe's preferred Asian partner could reshape South Asia's political economy. If European capital and attention flow overwhelmingly into India, Nepal may find itself further marginalised, with diminished leverage in its bilateral negotiations with Europeans.
Geopolitically, the squeeze may tighten. China, having invested heavily in Nepal's infrastructure and political networks, will respond to the EU-India alignment by courting Kathmandu more aggressively. India, with renewed confidence, will press harder for alignment on security, energy, and connectivity. Nepal could find itself pulled in both directions, with shrinking room to manoeuvre.
Yet Nepal's challenge is not merely to avoid being squeezed. As multilateral deals continue to lose resonance, India will likely strike similar deals with other countries. Formal launch of negotiations between India and Canada in November 2025 indicates India's ongoing pursuit of bilateral deals beyond the EU-India agreement. In this context, Nepal's challenge is to turn such agreements into a source of strategic agency. That means pushing for inclusion in emerging supply chains, securing firm transit guarantees, and diversifying exports without drifting into dependency. It also means strengthening domestic regulatory capacity so Nepali products can meet European standards directly, not only through Indian intermediaries.
Such reforms however require political clarity. As Nepal heads into another election, it is very likely to deliver yet another hung parliament. A fractured parliament makes strategic policymaking nearly impossible. Policy horizons are short, measured in months rather than mandates. While neighbours move ahead with long-term planning, Nepal risks being trapped in coalition arithmetic.
Yet the structural challenges this agreement poses cannot wait for the next coalition to sort itself out. India's newly privileged access to Europe will redraw regional value chains. It will reshape investment flows. It will accelerate India's rise as the preferred partner for European economies seeking to reduce Chinese exposure.
To navigate through changing terrain and in absence of political stability, business to be impacted by this pact must coalesce their voice. They must insist to any incoming government to treat strategic economic policy as a non-negotiable. That includes securing rules-of-origin flexibility with India, modernising transit logistics, and preparing Nepali industries to meet European standards. It also requires the government to resist any temptations to use foreign policy as a bargaining chip in domestic politics. Stability may be too much to expect from the coming election. Strategy, however, should be a must from the new government. To be left behind in the new trade geography of Asia is a choice, one that Nepal can ill afford.
Above all, Nepal must relearn the lesson small states often forget, that passivity is not neutrality. In a geopolitical environment shaped by emergent bilateral trade agreements, inaction is itself a choice, and rarely the safest one. This pact, and other bilateral agreement, will reshape South Asia's trade map. Whether Nepal becomes a corridor, a satellite, or a strategic partner depends as much on how Nepal positions itself as on its neighbours. In a world of roaring lions and circling dragons, even the smallest states must choose how tactfully they react.